International banking and financial market developments

Further monetary easing helped market participants to tune out signs of a global growth slowdown. The spate of negative economic news between mid-March and mid-April did little to interrupt the rise of equity prices in advanced economies. Further policy easing, followed promptly by an improved US outlook in early May, boosted market sentiment and lifted the main equity indices to new highs.
The Bank of Japan surprised markets in April by unveiling an ambitious new monetary easing framework, triggering a surge in equity prices and a drop in the exchange rate. But the rapid gains left equity valuations vulnerable to changes in sentiment, as witnessed in the recent bout of volatility. The announcement also triggered sharp price movements in the Japanese government bond market as investors weighed the yield implications of official purchases against expectations of higher inflation down the road.
The new phase of monetary policy accommodation in the major currency areas spilled over to financial markets around the world. With yields in core bond markets at record lows, investors turned to lower-rated European bonds, emerging market paper and corporate debt to obtain yield. More...

BIS reporting banks cut their cross-border claims during the fourth quarter of 2012, after little change in the previous quarter. A sharp reduction in cross-border interbank lending more than offset higher cross-border credit to non-bank borrowers. Across all reporting areas, banks curbed their cross-border exposure to advanced economies but increased it to emerging market economies and offshore financial centres.
Notional amounts outstanding of over-the-counter (OTC) derivatives remained stable in the second half of 2012 owing to several offsetting factors. Accelerating compression of trades with central counterparties pushed down the outstanding notional amount of interest rate swaps, but this was offset by higher amounts outstanding of forward rate agreements as bilateral contracts between reporting dealers were replaced with contracts between dealers and a central clearing counterparty. More...

Special features

A proposed creditor-funded recapitalisation mechanism for too-big-to-fail banks that reach the point of failure ensures that shareholders and uninsured private sector creditors of such banks, rather than taxpayers, bear the cost of resolution. The template is simple, fully respects the existing creditor hierarchy and can be applied to any failing entity within a banking group. The mechanism partially writes off creditors to recapitalise the bank over a weekend, providing them with immediate certainty on their maximum loss. The bank is subsequently sold in a manner that enables the market to determine the ultimate losses to creditors. As such, the mechanism can eliminate moral hazard throughout a banking group in a cost-efficient way that also limits the risk to financial stability. The creditor-funded mechanism is contrasted with other recapitalisation approaches, including bail-in and "single point of entry" strategies. More...

Credit-to-GDP gaps are valuable early warning indicators for systemic banking crises. As such, they are useful for identifying vulnerabilities and can help guide the deployment of macroprudential tools such as the build-up of countercyclical capital buffers. In line with Basel III recommendations, credit-to-GDP gaps can be further improved by taking account of all sources of credit to the private non-financial sector, rather than just bank credit. Drawing on a new BIS database, this special feature finds that total credit developments predict the risk of systemic crises better than indicators based solely on bank credit. More...

We use tools of extreme value theory to extract information about rare events from market prices. We find that such information contributes materially to measures of banks' systemic importance. These measures exhibit strong and intuitive relationships with simple characteristics of banks' balance sheets and income statements. More...